What’s Wrong with the Tax Foundation’s “Tax Freedom Day” Report?
We issued a paper this afternoon that explained the problems inherent in the Tax Foundation’s annual “Tax Freedom Day” report, the latest version of which the foundation issued earlier today. Here’s the opening:
The Tax Foundation released its annual “Tax Freedom Day” report today that, once again, leaves a strikingly misleading impression of tax burdens — announcing an “average” tax rate across the United States that’s likely higher than the tax rate that 80 percent of U.S. households actually pay.
To project the day when Americans will have “earned enough money to pay this year’s tax obligations at the federal, state, and local levels,” the Tax Foundation calculates the “average” tax rate by measuring tax revenues as a share of the economy (similar to estimates of total revenues as a share of Gross Domestic Product, or GDP). Its report suggests the “average” household pays this “average” tax rate.
In reality, in a progressive tax system like that of the United States, only upper-income households (the top 20 percent) pay tax at rates that are equal to or above revenues as a share of the economy. The non-partisan Congressional Budget Office and other authoritative sources show that low- and middle-income (the other 80 percent) pay a smaller share of their income in taxes than the Tax Foundation report implies.
The Tax Foundation acknowledges this issue in a methodology paper accompanying its report, noting that its estimates reflect the “average tax burden for the economy as a whole, rather than for specific subgroups of taxpayers.” Consequently, those who report on “Tax Freedom Day” as if it represented the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay.